GST cut: Government expects realtors to pare prices

At the last meeting, the council — comprising state and Union finance ministers — had agreed to reduce the levy on under-construction residential projects to 5% without input tax credit (ITC) from the current 12%, with credit for taxes paid on inputs such as paints, steel, cement and sanitary ware.

NEW DELHI: The GST Council, which is scheduled to meet on March 19, may restrict the use of tax credits accumulated by builders and allow a concessional rate for up to 10% of commercial property, such as shops, in residential complexes, expecting developers to pare prices.

At the last meeting, the council — comprising state and Union finance ministers — had agreed to reduce the levy on under-construction residential projects to 5% without input tax credit (ITC) from the current 12%, with credit for taxes paid on inputs such as paints, steel, cement and sanitary ware. For affordable housing projects, the rate will be slashed to 1% without ITC from 8% with tax credit. But the modalities for the rate reduction, which will be effective, are yet to be worked out.

Sources indicated that the officials were in favour of accepting the recommendations of a ministerial panel, which had suggested that intermediate tax on development rights, lease premium, floor space index and similar items should be exempted for houses where a completion certificate has not been issued.

Given the government assessment that builders were misusing the benefit of tax credit and did not pass on the

gains, the Centre is looking at the option of putting high claims under the lens. Sources told TOI that the issues have been discussed at the official level but a final call will be taken by the ministers.

The government is keen to ensure that builders do not raise prices, citing the withdrawal of input tax credit, and should actually reduce the rate. “Our analysis has shown that they were not passing on the benefits to consumers, although they were showing very high tax credit and paying a very low amount of tax in cash,” said an official.

According to the government’s calculation, prices should actually come down. For a Rs 40-lakh apartment, the builder should have factored in the impact of input tax credit, reducing the value to around Rs 38 lakh and then added the margin of, say, around 10%. As a result, the builder should have charged 12% GST on around Rs 42 lakh, translating into a tax of around Rs 5 lakh, which would have put the overall cost at Rs 47 lakh. Without ITC, with a 10% margin, the cost will now come to around Rs 44 lakh. A 5% tax will mean that the same apartment will cost Rs 46.2 lakh, according to the government’s back-of-the-envelope calculations.

A recent Allahabad high court judgment may, however, provide some relief with the court ruling that there shall be no tax levied in case of purchases made at duty free stores at the arrival or departure terminals.